Final answer:
The statement is false because the dividend yield is based on the current dividend payment and stock price, and does not equate to the dividend's growth rate. While a 5% growth rate indicates how much the dividend payment is expected to increase, the yield also depends on stock price changes.
Step-by-step explanation:
The statement that if a stock's dividend is expected to grow at a constant rate of 5% a year, the stock's dividend yield is 5% is false. The dividend yield is calculated based on the current dividend payment and the current stock price, not the expected growth rate of the dividend. For instance, if a stock is priced at $100 and pays a $5 dividend per share annually, its current dividend yield would be 5%. However, if the dividend is expected to grow at a rate of 5% per year, this does not necessarily imply the yield will remain at 5% because the stock price may also change.
The dividend yield is the percentage of the stock value that comes from dividends, and this yield can vary over time. According to historical data from the S&P 500 index described in the provided information, the average firm paid dividends equal to about 4% of its stock value from the 1950s to the 1980s, and since the 1990s, average dividends have dropped to about 1-2%. The yield depends on the current price of the stock and the dollar amount of dividends paid.
Capital gains, on the other hand, represent the profit made from the increase in stock value between the time of purchase and sale. The sum of dividend yield and capital gain rate is a part of the total rate of return for stock investments. However, dividend growth and stock price appreciation do not directly correlate in the determination of dividend yield.